Question 2 – Accounting for associates
On 1 July 2015, Richmond Ltd acquired 40% of the share capital of Carlton Ltd, for $160,000. The equity of Carlton Ltd on that date was:
| Share capital | $250,000 |
| Retained earnings | $95,000 |
All of the identifiable net assets of Carlton Ltd were recorded at fair value.
The following information is provided for Carlton Ltd for the year ended 30 June 2017:
| $ | |
| Operating profit before tax | 380,000 |
| Income tax expense | (114,000) |
| Operating profit after tax | 266,000 |
| Retained earnings at 1 July 2016 | 257,000 |
| Dividends paid | (100,000) |
| Retained earnings at 30 June 2017 | 423,000 |
Additional information:
- The closing inventory of Richmond Ltd included goods purchased from Carlton Ltd during the year for $6,000. Their cost to Carlton Ltd was $4,000.
- The closing inventory of Carlton Ltd included goods purchased from Richmond Ltd during the year for $12,000. Their cost to Richmond Ltd was $9,000.
- During the year ended 30 June 2017, Carlton Ltd revalued land upwards $50,000, resulting in asset revaluation surplus of $35,000 being recognised in equity.
- The tax rate is 30%.
Required:
i) Prepare an acquisition analysis in relation to the acquisition made by Richmond Ltd.
ii) Prepare the consolidation journal entries to account for Richmond Ltd’s investment in Carlton Ltd for the year ended 30 June 2017 in accordance with AASB 128, assuming that Richmond Ltd does prepare consolidated financial statements. Show all workings.
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